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Testimony:
Before the Senate Committee on Veterans' Affairs:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 9:30 a.m. EDT:
June 10, 2009:
VA Real Property:
VA Emphasizes Enhanced-Use Leases to Manage Its Real Property
Portfolio:
Statement of David Wise, Director:
Physical Infrastructure Issues:
GAO-09-776T:
[End of section]
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to testify today on the Department of
Veterans Affairs' (VA) use of enhanced-use leases (EUL). As you know,
EULs are typically long-term agreements with public and private
entities for the use of federal property, resulting in cash, in-kind
consideration, or both. My testimony today focuses on (1) VA's
authority to enter into EULs, (2) how VA has used its EUL authority,
and (3) the relationship between VA's authorities and the amount of
real property that is retained or sold. This statement is based on our
report issued on February 17, 2009, entitled Federal Real Property:
Authorities and Actions Regarding Enhanced Use Leases and Sale of
Unneeded Real Property.[Footnote 1] To prepare that report, we analyzed
the authorities and actions of the 10 largest federal land-holding
agencies, including VA, to enter into EULs and sell unneeded real
property. We reviewed VA's legal authorities related to EULs, the sale
of real property, and retention of proceeds from EULs and sales;
collected data on VA's use of EULs; and visited a property that VA is
leasing under an EUL. We conducted our work in accordance with all
sections of GAO's Quality Assurance Framework that are relevant to our
objectives.
With more than 32,000 acres of land and over 6,200 buildings on
approximately 300 sites, VA is among the largest federal property-
holding agencies and the operator of one of the largest health care-
related real estate portfolios in the nation. However, many of VA's
facilities were built more than 50 years ago and are no longer well
suited to providing care in the current VA system. As a result, VA has
millions of square feet of property that is underutilized or vacant
because of age, condition, location, or other factors. Operating and
maintaining unneeded property requires VA to spend appropriations that
could otherwise be used to provide direct medical care or other
services. In a report we issued last year, we estimated that VA spent
$175 million in fiscal year 2007 operating underutilized and vacant
space at its medical facilities.[Footnote 2]
VA Has Authority to Enter into EULs and Use the Proceeds with Few
Restrictions:
VA may enter into EULs and use the proceeds under several authorities.
VA may enter into EULs for "underutilized" or "unutilized" real
property for up to 75 years in exchange for "fair consideration," which
can be in cash, in-kind consideration, or both.[Footnote 3] In-kind
consideration may include goods and services that benefit VA, such as
the provision of office, storage, or other usable space; or
construction, repairs, remodeling, maintenance, or other physical
improvements to VA facilities. After covering the expenses associated
with the EUL, VA may use the remaining proceeds for a variety of
purposes, including developing additional EULs; providing medical care;
and, at the Secretary's discretion, construction, alteration, and
improvement of any VA medical facility.[Footnote 4] Moreover, if the
Secretary of VA determines during the term of an EUL or within 30 days
after the end of the lease term that the department no longer needs the
property, the Secretary is authorized to initiate an action to dispose
of the property.[Footnote 5] VA may deposit the proceeds from the
disposal of an EUL property into its Capital Asset Fund (CAF) and use
those proceeds for property transfer costs and construction, subject to
further congressional action.[Footnote 6] Alternatively, at the
Secretary's discretion, as provided in VA's annual appropriations acts,
VA may deposit the proceeds from the disposal of an EUL property into
its major or minor construction accounts and use those proceeds for
construction, alteration, and improvement projects for any VA medical
facility without further congressional action.[Footnote 7] VA's EUL and
CAF authorities are listed in appendix I.
VA Has Used EULs to Reduce Its Underutilized Property:
VA has used its EUL authority to reduce the amount of its underutilized
and unutilized property, and to receive financial and nonfinancial
benefits. In its fiscal year 2010 budget submission, VA reported that
it disposed of 49 buildings and land in fiscal year 2008 using its EUL
authority. According to VA, the agency has 52 active EULs, which
include housing, health care facilities, mixed-use projects, golf
courses, and other projects. For example,
* In 2005, in Lakeside (Chicago), Illinois, VA reduced its
underutilized property at the medical center by nearly 600,000 square
feet by using its EUL authority with Northwestern Memorial Hospital.
This EUL involved a consolidation of existing services where VA
relocated inpatient beds and support services to other campus sites and
leased the property to Northwestern, therefore reducing VA's
underutilized property at the medical center. VA received $28 million
upon execution of the lease.
* In 2006, at Fort Howard, Maryland, VA entered into an EUL that will
use about 300,000 square feet of vacant space to develop a retirement
community, with priority placement for veterans. While VA has retained
a portion of space on its medical campus for an outpatient clinic, it
has largely reduced the vast majority of its total space at Fort Howard
through the EUL. According to VA, the project will save VA over $1.5
million in construction costs and to avoid approximately $1 million in
costs annually.
* In another EUL, VA is leasing property in Hillsborough, New Jersey,
called Veterans Industrial Park to a company that subleases the
property to a variety of commercial interests needing warehouse or
light manufacturing space and to the county government. VA officials
said that VA did not consider selling this property because, in 1999,
when the agency entered into the EUL agreement, it did not have the
authority to retain the proceeds from the sale of real property. In
addition, the General Services Administration, which sells real
property for federal agencies, had a similar property nearby that it
had been unable to sell. Other than a small area on the property that
is used for VA services to collect and distribute military clothing to
homeless veterans, the property lessees are commercial renters who are
not providing any direct services to VA. However, VA officials said
that VA considers such EULs to be in the agency's interest because VA
receives about $300,000 to $390,000 a year from rental income that it
can use for its priorities.[Footnote 8] (See figure 1 for photographs
of this property.)
Figure 1: Veterans Industrial Park, an EUL Generating Lease Payments to
VA:
[Refer to PDF for image: two photographs]
Source: GAO.
[End of figure]
VA's Authorities Affect How the Agency Retains and Disposes of Real
Property:
In addition to its EUL authority, VA may sell unneeded real property
and retain the proceeds under its CAF authority.[Footnote 9] Under that
authority, before VA can dispose of a property, it must determine that
the property is no longer needed by the department in carrying out its
functions and is not suitable for providing services to the homeless by
the department or another entity. If VA sells property under its CAF
authority, it may use the proceeds for property disposal costs, minor
medical construction projects, or costs associated with the transfer or
adaptive use of historic VA properties. Use of these proceeds is
subject to further congressional action.
Despite this authority to sell property, VA has not sold any property
through its CAF authority. Rather, VA sold one property--the Lakeside
Medical Center in Chicago--through its EUL authority.[Footnote 10]
According to VA officials, VA places greater emphasis on entering into
EULs, compared to real property sales, in part because VA can enter
into EULs with fewer restrictions than under its CAF authority. For
example,
* VA may enter into EULs without having to screen the property for
homeless use, while property must be screened for homeless use if VA is
selling the property under its CAF authority. VA officials indicated
that disposing of property under the McKinney-Vento Homeless Assistance
Act can be time-consuming and cumbersome, taking an average of 2 years.
Under this law, all properties that the Department of Housing and Urban
Development deems suitable for use by the homeless go through a 60-day
holding period, during which the property is ineligible for disposal
for any other purpose. Interested representatives of the homeless
submit to the Department of Health and Human Services (HHS) a written
notice of their intent to apply for a property for homeless use during
the 60-day holding period. After applicants have given notice of their
intent to apply, they have up to 90 days to submit their application to
HHS, and it has the discretion to extend the time frame if necessary.
Once HHS has received an application, it has 25 days to review, accept,
or decline the application. Furthermore, according to VA officials, VA
may not receive compensation from agreements entered into under the
McKinney-Vento Act.
* VA has greater flexibility to use proceeds from EULs compared to
proceeds from the sale of property through its CAF authority. While VA
has the authority to retain and spend proceeds from EULs without the
need for further congressional action, proceeds retained under CAF
authority are subject to further congressional action. Furthermore, VA
may use EUL proceeds for purposes unrelated to real property, such as
providing health care services, which are not permitted under VA's CAF
authority. VA officials also said that EULs allow VA to realign its
asset portfolio in a way that supports its mission by using EULs to
obtain facilities, services, in-kind consideration, or revenue for VA
requirements that would otherwise be unavailable or unaffordable. The
officials added that local and state governments, veterans groups,
private partners, and nonprofit entities and other community members
potentially benefit when these properties are redeveloped to provide
new services and economic opportunities to veterans and the community.
VA produces an annual report that discusses and tracks the benefits of
its active EULs for the past fiscal year.
Despite VA's preference for using EULs, VA officials said that
implementing an EUL agreement can take a long time--anywhere from 9
months to 2 years. According to VA, each EUL is unique and involves a
learning process. In addition, VA officials commented that the EUL
process can be complicated. The officials noted that land due diligence
requirements (such as environmental and historic reviews), public
hearings, congressional notification, lease drafting, negotiation, and
other phases contribute to the length of the overall process. VA has
taken actions to reduce the time it takes to implement an EUL
agreement, but despite changes to streamline the EUL process, some
officials stated that it is still time consuming and cumbersome.
Mr. Chairman, this concludes my prepared remarks. I would be happy to
answer any questions that you or other members of the Committee may
have.
For future contacts regarding this statement, please contact David Wise
at (202) 512-2834 or wised@gao.gov. Contact points for our Offices of
Congressional Relations and Public Relations can be found on the last
page of this statement. Mike Clements, Assistant Director; Bob Homan;
Tara Jayant; Susan Michal-Smith; and Alywnne Wilbur also made key
contributions to this statement.
[End of section]
Appendix I: VA Enhanced-Use Leasing and Capital Asset Fund Authorities:
Authority: Enhanced-Use Leases 38 U.S.C. §§ 8161-8169;
Description: The Secretary of Veterans Affairs (VA) is authorized to
enter into leases for up to 75 years with public and private entities
for underutilized and unutilized real property that is under the
Secretary's jurisdiction or control. EULs shall be for "fair
consideration," (i.e., cash and/or in-kind consideration, such as
construction, repair, or remodeling of department facilities);
providing office space, storage, or other usable space; and providing
goods or services to the department. The authority to enter into EULs
terminates on December 31, 2011.
Authority: Retention of Proceeds/Enhanced Use Leases 38 U.S.C. § 8165;
Description: Expenses incurred by the Secretary of VA in connection
with EULs will be deducted from the proceeds of the lease and may be
used to reimburse the account from which the funds were used to pay
such expenses. The proceeds can be used for any expenses incurred in
the development of additional EULs. Remaining funds shall be deposited
into the VA Medical Care Collections Fund (see authority below for
additional uses of EUL proceeds).
Authority: Retention of Proceeds/Enhanced Use Lease Property
Consolidated Security, Military Construction and Veterans Affairs
Appropriations Act of FY 2009, P.L. No. 110-329, Division E, § 213, 122
Stat. 3574, 3711 (2008);
Description: At the Secretary's discretion, proceeds or revenues
derived from EUL activities, including disposal, may be deposited into
the "Construction, Major Projects" and "Construction Minor Projects"
accounts and used for construction, alterations, and improvements of
any VA medical facility.[A]
Authority: Disposal of Enhanced Use Lease Property 38 U.S.C. § 8164;
Description: If the Secretary of VA determines during the term of an
EUL or within 30 days after the end of the lease term that the property
is no longer needed by the department, the Secretary is authorized to
initiate an action to dispose of the property.
Authority: Retention of Proceeds/Disposal of Enhanced Use Lease
Property 38 U.S.C. § 8165;
Description: Funds received by VA from a disposal of an EUL property
are deposited into the VA Capital Asset Fund and may be used to the
extent provided for in appropriations acts for property transfer costs
such as demolition, environmental remediation, maintenance, and repair;
costs associated with future transfers of property under this
authority; costs associated with enhancing medical care services to
veterans by improving, renovating, replacing, updating or establishing
patient care facilities through construction projects; and costs
associated with the transfer or adaptive use of property that is under
the Secretary's jurisdiction and listed on the National Register of
Historic Places (see authority below for additional uses of EUL
disposal proceeds).
Authority: Retention of Proceeds/Disposal of Enhanced Use Lease
Property Consolidated Security, Military Construction and Veterans
Affairs Appropriations Act of FY 2009, P.L. No. 110-329, Division E, §
213, 122 Stat. 3574, 3711 (2008);
Description: At the Secretary's discretion, proceeds or revenues
derived from EUL activities, including disposal, may be deposited into
the "Construction, Major Projects" and "Construction Minor Projects"
accounts and used for construction, alterations, and improvements of
any VA medical facility.
Authority: VA Transfer Authority-Capital Asset Fund 38 U.S.C. § 8118;
Description: The Secretary of VA is authorized to transfer real
property under VA's control or custody to another department or agency
of the United States, to a state or political subdivision of a state,
or to any public or private entity, including an Indian tribe until
November 30, 2011. The property must be transferred for fair market
value, unless it is transferred to a homeless provider. Property under
this authority cannot be disposed of until the Secretary determines
that the property is no longer needed by the department in carrying out
its functions and is not suitable for use for the provision of services
to homeless veterans by the department under the McKinney-Vento Act or
by another entity under VA's EUL authority.
[A] This provision has been included in numerous appropriations acts.
See the Military Construction and Veterans Affairs Appropriations Act
of FY 2009, P.L. No. 110-329, Division E, § 213,122 Stat. 3574, 3711
(2008); the Consolidated Appropriations Act of FY 2008, P.L. No. 110-
161, § 213, 121 Stat. 1844, 2270 (2007); the Consolidated
Appropriations Act of FY 2005, P. L. No. 108-447, § 117, 118 Stat.
2809, 3293 (2004); and the Consolidated Appropriations Act of FY 2004,
P.L. 108-199, § 117, 118 Stat. 3, 371 (2004).
[End of table]
[End of section]
Footnotes:
[1] [hyperlink, http://www.gao.gov/products/GAO-09-283R] (Washington,
D.C.: Feb. 17, 2009).
[2] GAO, Federal Real Property: Progress Made in Reducing Unneeded
Property, but VA Needs Better Information to Make Further Reductions,
[hyperlink, http://www.gao.gov/products/GAO-08-939] (Washington, D.C.:
Sept. 10, 2008).
[3] 38 U.S.C. §§ 8161-8169. This authority terminates on December 31,
2011.
[4] 38 U.S.C. § 8165 and P.L. No. 110-329, Division E, § 213, 122 Stat.
3574, 3711 (2008).
[5] 38 U.S.C. § 8164.
[6] 38 U.S.C. § 8165 and 38 U.S.C. § 8118. An appropriations act would
need to be passed providing for VA to use these proceeds.
[7] P.L. No. 110-329, Division E, § 213, 122 Stat. 3574, 3711 (2008).
[8] According to VA officials, VA also has a profit participation
agreement for the EUL based on the lessee's net income. In 2007, VA
received proceeds from the profit participation for the first time in
the amount of about $32,000.
[9] 38 U.S.C. §8118.
[10] The Lakeside VA Medical Center in Chicago was sold under an EUL
agreement after VA determined that it was no longer needed. Sales
proceeds were $50 million, which included a net present value rental
return of $28 million received in 2005 for a 75-year EUL term and an
additional $22 million received in 2006, with the actual closing of the
sale of the property.
[End of section]
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